FOREX-Yen squeezed as hawkish turn grips central banks

The yen was ‌under pressure ​on Tuesday as traders wagered that policymakers in Japan will struggle to keep up with a hawkish turn by global central banks, leaving the country's interest rates at a wide gap with major peers. Moves ‌were contained thanks to a holiday in Japan and because of the risk of intervention, after the Nikkei newspaper reported Japan checked dollar/yen rates on Friday. Such a move is often a precursor to stepping into the market.

After drifting lower on Monday, the yen slipped to 157.47 versus the ‌dollar in the Asia session, while elsewhere the dollar fell slightly. The euro inched up to $1.1476and sterling to $1.3383. Aside from bouncing after ‌the rate check report, the yen has been under pressure since a Bank of Japan interest rate hike on Friday came with two dovish dissents.

That contrasted with the Federal Reserve, which also hiked rates last week, and most other global central banks which are sounding hawkish and have markets pricing more increases this year. "Unless the BOJ tightens ⁠policy more ​rapidly than the Federal Reserve, the approximately ⁠275-basis-point US-Japan rate differential should continue to support yen-funded carry trades," said Carlos Casanova, senior Asia economist at Union Bancaire Privée, in a note to clients.

"We expect dollar/yen to ⁠rise to 160 by year-end before appreciating moderately to 156 by mid-2027." Markets are pricing about a 30% chance that the BOJ hikes its benchmark short-term rate ​to 1.5% in October and a roughly 55% chance that the Fed will lift its funds rate window by 25 basis ⁠points to 4% to 4.25%.

Reserve Bank of Australia Governor Michele Bullocksaid upside risks to inflation may be materialising, given energy prices have stayed high, underlining wagers for a rate ⁠hike ​as soon as next week. The Aussie dollar hovered at $0.7120, while the battered New Zealand dollar appeared to catch a boost from central bank chief remarks that traders took as hawkish.

Reserve Bank of New Zealand Governor Anna Breman said if recent gains in oil prices persist, it ⁠would lead to somewhat higher inflation than previously forecast. The kiwi rose about 0.4% from a near three-month low to $0.5736.

Markets have priced about ⁠100 basis points of rate hikes over ⁠the next 12 months in New Zealand, but the kiwi has been weighed down because with the cash rate sitting at 2.75%, that still leaves it lagging the US. Cryptocurrencies, which rallied strongly on Monday, ‌eased slightly. Bitcoin was down ‌around 2% after touching an 8-month high above $87,000.